Select Committee on Environmental Audit Minutes of Evidence



Memoranda submitted by Environmental Audit Committee and the Department of Trade & Industry

 

INTRODUCTION

  The Government welcomes the enquiry by the Environmental Audit Committee into sustainable energy.

  The Government is committed to the development of renewable energy within the UK and to develop the competitive potential of the sector both at home and abroad. The Government's renewable energy policy has five key aims:

    —  to assist the UK to meet national and international targets for the reduction of emissions including greenhouse gases;

    —  to help provide secure, diverse, sustainable and competitive energy supplies;

    —  to stimulate the development of new technologies necessary to provide the basis for continuing growth of the contribution of renewables in the longer term;

    —  to assist the UK renewables industry to become competitive in home and export markets and in doing so to provide employment, and;

    —  to make a contribution to rural development.

  Previous administrations have supported sustainable energy over many years through research and development, and more recently through the Non-Fossil Fuel Obligation (NFFO). With the full liberalisation of the electricity market, it was necessary to consider an alternative mechanism to encourage the deployment of renewable energy. Growing concerns about the challenge of climate change have also increased the imperative to develop a more effective instrument. The Government held a consultation in March 1999 on New and Renewable Energy: Prospects for the 21st Century. Two subsequent consultations were held on October 2000 and August 2001 into detailed proposals for the Renewables Obligation. The Renewables Obligation, a market based approach to supporting renewables, was introduced on 1 April this year and will stimulate the demand for renewable energy, with an estimated value of 1 billion by 2010.

  Alongside the Obligation, a programme of capital grants has been established for renewable energy technologies that are still in their infancy and would not initially be commercially viable under the Renewables Obligation without additional support. Renewable energy is also exempt from the Climate Change Levy. The Government believes that these measures will provide the necessary incentive for a much wider deployment of renewable energy over the coming years, with a view to reaching the challenging target of 10 per cent of licensed electricity sales to come from renewable sources eligible for the Obligation by 2010. It has been very encouraging to see a number of announcements of major new investment in renewable energy in the past couple of months.

  The enquiry by the Environmental Audit Committee is therefore very timely, although the full impact of the new policy instruments will take some time to come through because of the long lead times for new project development. However, the early interest shown in both the Obligation and the associated capital grant programme, is very encouraging.

  The Committee has kindly relayed some questions to be addressed, which will be considered in turn.

ROLE AND RESPONSIBILITIES

  1.   What responsibilities does the DTI have for renewable energy, and to what extent is it responsible for the Government's sustainable energy strategy? Does the DTI consider that the current split of responsibilities for energy between departments is rational?

  The DTI is responsible for the development and implementation of energy policy as a whole, including sustainable energy. It is responsible for the development of policies to promote the deployment of renewable energy within England and Wales and for the management of programmes to stimulate the deployment of renewables through investment in research and development and supporting capital grant schemes. Whilst energy policy is a reserved matter, the Scottish Executive is responsible for the promotion of renewables in Scotland. Energy policy, including the promotion of renewables, is devolved in Northern Ireland.

  DEFRA are responsible for the Government's environment and climate change policies. As such, they are responsible for the promotion of energy efficiency, including the deployment of combined heat and power (CHP).

  Whilst recognising the strength of existing institutions, the PIU Review recommends—as question 2 below recognises—the establishment of a new Sustainable Energy Policy Unit to ensure greater co-ordination of energy-related analytical work across government and lead on the development of strategic policy. In considering any changes, it would be important to ensure clarity of responsibilities and real gains in the policy making process, so that the costs of any changes in institutions are recouped through improved performance in meeting Government objectives.

  2.   An important recommendation of the PIU Energy Review was that responsibilities for energy policy should be drawn together into a sustainable energy policy unit, as a prelude to the creation of a separate department. What view does it take on this recommendation? Will it implement it immediately as recommended by the PIU?

  The Government will be consulting on the PIU Energy Review. DTI and DEFRA will then co-ordinate the Government's response, across a number of Government departments, in preparation for the publication of a White Paper later this year. As part of this work the Government will be considering how responsibilities for the various aspects of energy policy should be brigaded.

  3.   Can you clarify progress on DTI's internal review of its Energy Group, and how it might affect the allocation of responsibilities for sustainable energy policy, renewables, NETA and energy markets.

  By 2 April a new DTI structure will be in place to achieve the Department's objective of working with business, consumers and employees to drive up UK productivity and competitiveness. Four new groups will have been established—Business, Fair Markets, Innovation and Services, as well as a Strategy Unit. Because of the need to take account of the PIU Energy Review, the Energy Group has two years to decide and implement any changes in its structure. A Transition Team has been established to take work forward. The Team is working with the external consultants and the Group to answer three questions:

    —  what should the objectives of the Group be;

    —  how should those objectives best be delivered; and

    —  what kind of organisation should the Group be (including how it works).

  The Transition Team's work is taking into account factors such as the Government's follow-up work to the PIU Review of Energy Policy. No decisions have yet been taken. The Group is also consulting external stakeholders, including members of the Energy Advisory Panel.

  4.   The PIU report includes a table of non-departmental bodies involved in administering energy efficiency policies. Please set out in a similar table all non-departmental bodies involved in funding for renewables, together with the amount of funding currently provided and a brief description of the areas funded. Does the DTI consider that the current multiplicity of funding sources for renewables and energy efficiency creates any difficulties for business? What difficulties would there be in creating a single funding agency for renewables?

  Aside from any departmental schemes run by DTI, DEFRA and the devolved administrations, the following non-departmental bodies are involved in financing renewable energy projects:

 

Non-departmental body

Amount of funding

Areas funded

New Opportunities Fund

50 million

At least 33 million for energy crops, 3 million for small-scale heat and 10 million for offshore wind. Focused on "Transforming Communities", strong community benefit. Common application process with DTI schemes.

The Carbon Trust

50 million

Low Carbon Innovation Programme. Supports all low carbon projects, not just renewables. Variety of support options, including grant aid or project financing

The Countryside Agency

No direct funding

Community Renewables Initiative. Local Support Teams helping communities to develop renewable energy schemes through information and advice.

Energy Savings Trust

No direct funding

Renewables Advice Centre—provides advice on domestic projects for renewable energy.

 

  We do not believe that the perceived multiplicity of schemes gives rise to any specific problems for businesses wishing to access the support. We are working to streamline the application procedures for project developers as far as possible, for example introducing a single application process for DTI and New Opportunities Fund support for offshore wind, and for energy crops and bioenergy. There is an ongoing dialogue on the design of the support programmes with key stakeholders, including trade organisations and individual businesses, to ensure that the programmes are readily accessible and deliver the policy objectives.

  There would be some considerations to be addressed in establishing a single funding body for renewables. The New Opportunities Fund support for renewables is not a replacement for government funding and will support projects that Government would not otherwise support. There is an arms-length relationship between the Fund's programmes and the DTI's schemes, although a common application process will be established. Projects supported by the Fund and by the Countryside Agency will have a stronger focus on community benefit that potentially schemes supported under the DTI schemes. There is a risk that a single funding agency may lose the focus on community involvement and ownership that the current involvement by the Fund and the Countryside Agency imparts.

STRATEGY AND POLICY INSTRUMENTS

  5.   A key recommendation of the PIU Energy Review is that, where trade-offs have to be made and achievement of climate change targets is threatened, priority should be given to environmental objectives. It also suggests that the DTI's energy objective should be redrafted to reflect this priority. What impact would such a change in emphasis have on DTI energy policy? Can the DTI set out any specific examples where it might make a difference?

  The Government will be consulting on the PIU Energy Review. DTI and DEFRA will then coordinate the Government's response, across a number of Government departments, in preparation for the publication of a White Paper later this year. As part of this work the Government will be considering whether changes are needed to energy policy objectives and priorities.

  6.   Is the DTI concerned about the number of different policy instruments in the energy area (CCL, RO, UKETS)? The PIU review suggests that the Government should seek to develop carbon pricing either through the introduction of a carbon tax or through a trading scheme. Does the DTI have any view on how either measure could be integrated with existing policy instruments, or indeed whether in the longer term there is scope to rationalise the number of policy instruments?

  The number of different policy instruments in the energy area reflects the different strands of policy in both the energy and environmental sectors. Supporting renewable energy gives other benefits besides carbon savings alone, such as an increase in the diversity and security of supply. These added benefits would not be recognised through a carbon tax or emissions trading alone.

  There may be scope to further rationalise policy instruments in due course but the measures should be seen as complementary, rather than overlapping. The Climate Change Levy covers all energy inputs—gas, electricity and heat—but only in the non-domestic sector. The Renewables Obligation covers only electricity sales, but across domestic and non-domestic sectors. The Emissions Trading Scheme covers, at present, only those participating companies. The case for future rationalisation of these schemes, and for more widespread carbon pricing, will be considered in the White Paper the Government expects to publish before the end of the year.

  7.   In certain other European countries (eg Germany), incentive mechanisms to promote renewable energy provide different levels of support for different technologies. Why did the DTI decide not to invite views on a banded approach in its initial consultation on the Renewables Obligation? What view does it take on the extent to which the RO will provide adequate financial incentives for technologies other than wind?

  It is incorrect to say that the DTI did not consult on a banded approach in the Renewables Obligation Preliminary Consultation. In section 2.11 of the Preliminary Consultation, the case for a banded Obligation was addressed with the proposal:

    "The Government has considered the arguments for a banded Obligation and is proposing to reject this approach. It takes the view that it would involve Government in choosing which specific technologies should be used to meet the Obligation."

  Around 25 per cent of respondents to the consultation commented on the issue of banding. Of those respondents, opinion was fairly evenly divided on whether the Obligation should be banded, with the division being based on technology interests. Overall, there was no clear consensus on this issue.

  Government has taken the view that to band the Obligation would require it to specify the extent to which different technologies would contribute to the Obligation over a twenty-five year time frame. As such, a banded approach would appear inconsistent with the market-based approach behind the Obligation. It would run counter to our approach of setting an overall target for renewables and leaving the market to deliver in the most cost-effective way. A banded obligation would inhibit competition between technologies and would potentially restrict future innovation and the development of new and emerging technologies. For that reason, banding was rejected.

  It is recognised that some technologies are not yet in a position to develop under the Renewables Obligation without further support. Further support for technologies currently marginal or uneconomic under the Obligation is being provided through capital grant schemes for offshore wind, energy crops and bioenergy, wave and tidal power, and photovoltaics. We anticipate that the costs of these promising energy sources will fall as economies of learning through early deployment are realised so that these technologies become economically attractive within the Obligation. This approach, therefore, will prove more cost-effective than providing further support for these technologies through a banded Obligation over the full twenty-five year period of the Obligation.

  8.   To what extent can the exclusion of imported renewable energy under the Renewables Obligation be reconciled with single market rules and EU attempts to generate an EU wide market in renewables certificates? What impact would any change in the treatment of imported renewable energy have on achieving the targets set by the Renewables Obligation?

  The current exclusion of imported renewables is not inconsistent with single market rules and moves towards an EU-wide trade in renewable energy. The current restrictions reflect the current state of harmonisation within EU energy, and specifically, renewable energy markets. There remain a number of distortions within these markets that prevent the effective functioning of a competitive market in renewable energy. For an effective EU-wide market in renewable energy to operate, there are a number of key requirements that are not currently in place, such as open access to all Member State electricity markets, equivalence of support for renewables in different Member States, a comprehensive certification scheme to prove the renewable origins of electricity, agreement on the treatment of the carbon savings associated with renewable energy and measures to ensure that benefit is not received in more than one Member State ("double dipping"). It should also be noted that UK renewables electricity has not been able to benefit from renewables support mechanisms in other member states.

  These issues are complex and the extent to which they block the operation of an open market in renewable energy will differ between Member States. We therefore believe that the best way forward is to address these issues through bilateral agreements between Member States, reflecting that the renewable energy market in some Member States will be more closely compatible with the UK market than others. We will be considering such bilateral arrangements in due course, which would require further consultation with the renewables industry and probably further primary legislation.

  We are concerned that the Renewables Obligation and other support schemes being put in place across the EU should lead to an increase in renewable generating capacity across the EU. There is a risk that targets may be achieved without seeing further development and deployment of renewables if the price support in different countries leads to "country switching" without any additional new capacity being developed.

  The impact of any change in the treatment of imported renewable energy would be complex. It would be important to ensure it did not undermine the commercial expectations of UK renewable generators and that it did provide equality of treatment for UK renewables in other countries. These issues need to be considered carefully in the context of bilateral arrangements, rather than a EU-wide approach at this time.

  9.   Please provide data for the last 5 years (1997-98 to 2000-01, and 2001-02 forecast outturn) on capital grant and R&D expenditure for renewables and other energy sources (eg nuclear, clean coal, etc) showing budget and outturn expenditure for each type of energy source.

  Government funding for research and development through the New & Renewable Energy Programme and through the Research Councils is shown below. This includes support for research into cleaner coal technologies, to which the figures in parentheses refer.

Year

Research Grants
DTI NRE

Research Grants,
Research Councils

1997-98

13.0 million (4.1million CCT)

2.9 million

1998-99

11.3 million (3.4 million CCT)

3.1 million

1999-2000

12.5 million (2.9 million CCT)

2.4 million

2000-01

13.1 million (2.6 million CCT)

2.8 million

2001-02

18.5 million (4.9 million CCT) (forecast)

5.5 million (forecast)

 

  The capital grant programmes for renewable energy are not expected make disbursements before 2002-3.

  Publicly funded research into nuclear fission reactors stopped in 1994, with the end of the fast reactor programme. HSE co-ordinates a Nuclear Safety Research programme, which is funded by the relevant nuclear licensees (more information about the programme is available at www.hse.gov.uk/nsd/nsres.htm).

  DTI support for research into nuclear fusion is as follows:

1997-98

16.6 million

1998-99

12.6 million

1999-2000

14.4 million

2000-01

14.3 million

2001-02

14.3 million (forecast)

 

  10.   Does the DTI accept that the balance it strikes in the provision of capital grants and R&D funding for competing renewable technologies does effectively amount to prioritising these technologies which it considers offer significant potential for the future? What view does it take on the current balance between market support (through the RO) and capital funding, and on the adequacy of present levels of capital funding for those technologies which are currently further from the market such as biomass, wave and PV? What mechanism is in place for reviewing the adequacy of support for each area and adjusting funding accordingly?

  The level of support for individual technologies, whether through capital grants or R&D funding, reflects the potential for the particular technology to contribute to renewable energy targets and the scope for the technology to become competitive. The DTI has prepared, in extensive consultation with industry and academia, a series of "technology route maps" that spell out the necessary steps for these technologies to become competitive and established in the marketplace.

  At present, we believe that the current level of capital funding is appropriate for the stage of development of the technologies being supported. There has to be a strong concern for value-for-money in ensuring that good money is not chasing after bad projects. It would, of course, be premature to speculate on what further funding may be required in future without assessing the outcome of current capital grant schemes. The impact of the capital grant schemes will be evaluated by independent consultants through DTI's evaluation procedure. The impact will also be seen in the contribution made by the technologies supported towards the overall renewables generation data that will be reported by Ofgem on an annual basis.

  11.   Please provide the latest available data on implementation of NFFO schemes (contracted capacity and actual uptake by NFFO order and by type of energy source). What impact does the DTI expect the recently introduced portability clause for NFFO schemes to have? In view of the relatively low contract prices negotiated under NFFO 4 and 5, has the DTI estimated the percentage final uptake for these Orders that can now be expected?

NON-FOSSIL FUEL OBLIGATION* STATUS SUMMARY AS AT 30 SEPTEMBER 2001

 

Technology

  Contracted Projects

Live Projects

 
 

No

Capacity MW (dnc)

No

Capacity MW (dnc)

Biomass

32

255.960

9

113.084

Hydro

146

95.412

63

41.533

Landfill Gas (LFG)

329

699.713

189

400.204

Municipal and Industrial Waste (MIW)

90

1398.159

17

205.329

Sewage Gas

31

33.864

24

25.039

Wave

3

2.000

1

0.2

Wind

302

1153.737

74

169.175

Total

933

3638.845

377

954.564

 

  *Includes those projects formerly contracted under NFFO 1 and 2. These contracts expired on 31 December 1998; data on generating projects have been estimated from the information available.

NFFO STATUS SUMMARY AS AT 30 SEPTEMBER 2001


Technology

Contracted Projects

 

Live Projects

 
   

No

Capacity MW (dnc)

No

Capacity MW (dnc)

NFFO-1

Hydro

26

11.851

21

10.001

 

LFG1

25

35.496

19

30.776

 

MIW 2

4

40.63

4

40.63

 

Other

4

45.48

4

45.48

 

Sewage gas

7

6.445

6

5.98

 

Wind

9

12.211

5

8.138

 

Total

75

152.113

59

141.005

NFFO-2

Hydro

12

10.857

10

10.457

 

LFG

28

48.449

26

46.393

 

MIW

10

271.48

2

31.5

 

Other

4

30.15

1

12.5

 

Sewage gas

19

26.859

18

19.059

 

Wind

49

84.431

23

52.452

 

Total

122

472.226

80

172.361

NFFO-3

ECAFW 3 - Gasification

3

19.056

1

8

 

ECAFW - Other

6

103.805

2

69.5

 

Hydro

15

14.48

8

11.738

 

LFG

42

82.071

42

82.071

 

MIW

20

241.865

6

77.419

 

Wind - large

31

145.918

10

41.021

 

Wind - small

24

19.708

10

9.47

 

Total

141

626.903

79

299.219

NFFO-4

AW 4

6

6.58

   
 

ECFW 5

7

67.335

   
 

Hydro

31

13.224

7

2.102

 

LFG

70

173.68

51

135.711

 

MIW - CHP 6

10

115.288

2

14.98

 

MIW - FBC 7

6

125.927

   
 

Wind - large

48

330.359

1

2.528

 

Wind - small

17

10.326

4

2.755

 

Total

195

842.719

65

158.076

NFFO-5

Hydro

22

8.865

2

0.4

 

LFG

141

313.728

44

88.653

 

MIW

22

415.748

   
 

MIW - CHP

7

69.971

   
 

Wind - large

33

340.161

   
 

Wind - small

36

28.672

2

1.69

 

Total

261

1177.145

48

90.743

 

All NFFO

794

3271.106

331

861.404

1 Landfill gas;

2 Municipal and industrial waste;

3 Energy crops, agricultural and forestry wastes;

4 Agricultural wastes;

5 Energy crops and forestry wastes;

6 Combined heat and power;

7 Fluidised bed combustion.

          

 

SRO STATUS SUMMARY AS AT 30 SEPTEMBER 2001

 



Technology

Contracted Projects

 

Live Projects

 
   

No

Capacity MW (dnc)

No

Capacity MW (dnc)

SRO-1

Biomass

1

9.8

1

9.8

 

Hydro

15

17.25

6

4.04

 

Wind

12

45.6

7

25.13

 

Waste-to-energy

2

3.78

2

3.78

 

Total

30

76.43

16

42.75

SRO-2

Biomass

1

2

   
 

Hydro

9

12.36

1

0.83

 

Wind

7

43.63

   
 

Waste-to-energy

9

56.05

4

15

 

Total

26

114.04

5

15.83

SRO-3

Biomass

1

12.9

   
 

Hydro

5

3.9

   
 

Wind - large

11

63.43

1

8.29

 

Wind - small

17

14.06

3

2.47

 

Waste-to-energy

16

49.11

2

6.12

 

Wave

3

2.0

1

0.2

 

Total

53

145.4

7

17.08

 

All SRO

109

335.87

28

75.66

 

NI-NFFO STATUS SUMMARY AS AT 30 SEPTEMBER 2001

 

 

Technology

Contracted Projects

 

Live Projects

 
   

No

Capacity MW (dnc)

No

Capacity MW (dnc)

NI-NFFO-1

Hydro

9

2.374

7

1.89

 

Sewage gas

5

0.56

   
 

Wind

6

12.664

6

12.664

 

Total

20

15.598

13

14.554

NI-NFFO-2

Biogas

1

0.25

   
 

Biomass

2

0.304

2

0.304

 

Hydro

2

0.251

1

0.075

 

LFG

2

6.249

   
 

MIW

1

6.65

   
 

Wind

2

2.567

2

2.567

 

Total

10

16.271

5

2.946

 

All NI-NFFO

30

31.869

18

17.5

 

  We anticipate that around 100 projects will benefit from the Electricity from Non-Fossil Sources (Locational Flexibility) Order 2001. A survey of NFFO contract holder conducted by one of the industry trade bodies suggested that up to 341MW may come forward from relocated projects. This is broken down by NFFO Order and technology band as follows:

 

 



 

Undeveloped MW

MW wishing to
relocate

NFFO-3

Wind - large

109

94.22

 

Wind—small

11.779

3.106

 

Hydro

2.78

0

 

MIW1

164.47

48.7

 

ECAFW2—Gasification

45.37

0

 

Total

333.399

146.026

NFFO-4

Wind - large

327.872

41.506

 

Wind—small

8.368

3.7373

 

Hydro

11.9

0.656

 

LFG3

38

12

 

MIW - FBC4

126

61

 

MIW - CHP5

100.3

0

 

ECFW6

67.4

67

 

AW7

6.6

0

 

Total

686.44

185.9

NFFO-5

Wind—large

340

0

 

Wind—small

26.31

7.24

 

Hydro

9

0.075

 

LFG

260.1

2

 

MIW

416

0

 

MIW—CHP

70

0

 

Total

1121.41

9.315

 

Total of NFFO-3, 4 & 5

2141.49MW

341.2403MW


1 Municipal and industrial waste;

2 Energy crops, agricultural and forestry wastes;

3 Landfill gas;

4 Fluidised bed combustion;

5 Combined heat and power;

6 Energy crops and forestry wastes;

7 Agricultural wastes.

      

 

  These figures are based on earlier project data and so some projects shown here as undeveloped have now been commissioned. In order to relocate, projects must secure all the necessary consents at the new site and therefore some of the 341MW seeking to relocate may not be developed if these consents cannot be secured.

  It is difficult to estimate the final total capacity that will be developed under NFFO as some of the contracts not looking to relocate may well still be developed on the existing site. In particular, it is too early to tell what contribution will come forward from NFFO-5 as many projects will still be in the early stages of development. A conservative estimate may be that NFFO, in total, will deliver around 1.5GW of capacity.

  12.   Please list and briefly describe all planning consents that may be required for renewable energy projects (including off-shore wind). What progress has the DTI made in creating a "one-stop shop" for planning consents?

  In England and Wales, developers of onshore renewable energy projects need planning consents under:

    —  Section 36, Electricity Act 1989 for the construction and operation of a generating station (administered by DTI) if over 50 MW; or

    —  Section 57, Town and Country Planning Act 1990 for planning permission for a power station if at or below 50 MW (Local authority)

  Again depending on the nature of the project, there are other planning consents that may also be required:

    —  Section 37, Electricity Act 1989 for the construction of an overhead line (DTI);

    —  Section 57, Town and Country Planning Act 1990 for planning consent e.g. for construction of an electrical sub-station onshore (Local authority).

  In England and Wales, developers need three main consents/licences to build an offshore wind farm:

    —  Section 36, Electricity Act 1989 for the construction and operation of a generating station (administered by DTI);

    —  Section 5, Food Environment Protection Act 1985 for the deposit of articles/materials in the sea/tidal waters (DEFRA); and

    —  Section 34, Coast Protection Act (CPA) 1949 for any construction under or over the seashore lying below the level of mean high water spring (DTLR).

  As an alternative developers could apply for an Order under the Transport and Works Act 1992, which could disapply the requirement for both consents under the Coast Protection Act and Electricity Act listed above.

  As the various licences/consents are administered by three separate Departments, DTI has established the Offshore Renewable Consents Unit to serve as a focal point for offshore windfarm applications, to promote a coordinated streamlined approach, cut out duplication and provide developers with a single point of contact for the clarification of issues and status reports on the progress of applications etc.

  Depending on the nature and location of the project, there are other consents that may also be required as follows:

    —  Section 37, Electricity Act 1989 for the construction of an overhead line (DTI);

    —  Section 109, Water Resources Act 1991 for structures/cabling in, over or under a watercourse that is part of a river (Environment Agency);

    —  Section 57, Town and Country Planning Act 1990 for planning consent eg for construction of an electrical sub-station onshore (Local authority).

TARGETS

  13.   Given the fact that different areas of the UK have different potentials for delivering renewable energy, what formal process is in place for determining the share of any UK target that England, Scotland, Wales and Northern Ireland each should bear? Do you think that present arrangements in this area are adequate? In what ways should they be improved?

  The setting of renewable energy targets in Scotland and Northern Ireland is a devolved matter and a matter for those devolved administrations. However, the Scottish Executive has put in place the Renewables Order Scotland, which is the same as that for England and Wales. The ROS has been framed so as to achieve a 5 per cent increase in renewables' share of Scottish consumption by 2010. The Scottish Executive is of the view that the share of Scottish generation held by renewables will be substantially greater than that[1]. In framing targets, DTI has also assumed that 10 per cent of electricity consumption in Northern Ireland will be met from renewables. It is clear, however, that different regions within England and Wales have differing renewable energy resources. The DTI recently published a summary report of regional assessments of renewable energy resources. It is intended that these resource studies will inform regional planning guidance and regional targets for the development of renewable energy. These regional studies show quite a wide variation in renewable energy resources between regions, ranging from 0.2TWh to 4.3 TWh.

  We believe that these arrangements are adequate and that the element of local involvement and commitment to any renewable energy targets is important and should be retained.

  14.   Please clarify—in terms of coverage and eligibility of different technologies—the relationship between the Renewables Obligation target of 10.4 per cent, the UK 10 per cent target, and the EU indicative target of 10 per cent for the UK.

  The Government's target is that 10 per cent of licensed electricity sales in Great Britain should come from renewable sources eligible for the Renewables Obligation. The Renewables Obligation target for 2009-10 is 9.7 per cent and for 2010-11 10.4 per cent, thereby averaging about 10 per cent for the calendar year 2010. The UK indicative target under the EU Directive on the promotion of electricity produced from renewable energy sources in the internal electricity market will be 10 per cent of gross domestic electricity consumption. Gross domestic consumption equates to domestic production, plus any imports, minus any exports from the UK, and is estimated to be 380TWh in 2010. It includes the amounts of electricity "consumed" in transmission and distribution losses and electricity consumption by those whose electricity supplier is exempt from the need for a license. The EU target, therefore, will be 38TWh, compared to a Renewables Obligation target of 33.6TWh.

  There are three essential differences between the EU target and the national target:

    —  Large hydro (over 20MW) counts towards the EU target but not the domestic target.

    —  The non-fossil derived element of energy from mixed waste incineration can also be counted towards the EU target.

    —  Renewable electricity generated in Northern Ireland is part of the UK total for the EU target.

  15.   Was the Scottish target for renewable energy (18 per cent) set as a result of negotiation with the DTI? What is the relationship (if any) between this target, the Renewables Obligation target, and the UK 10% target? To what extent, for example, is the Scottish target required for UK to achieve 10 per cent?

  As the promotion of renewable energy in Scotland is a devolved matter, any Scottish targets are a matter for Scottish Ministers and the Scottish Executive. That notwithstanding, the DTI has worked closely with the Scottish Executive in developing the Renewables Obligation and the Renewables Obligation (Scotland). Both Obligations share the same levels over the duration of the Obligation. Electricity generated in Scotland can be used to meet the RO in England and Wales and vice versa. If both Obligations are met, then the UK's overall target will be met. [2]

  16.   Has the DTI carried out any analysis of the impact of NETA on the achievement of targets for renewables and for climate change? If so, what are the results?

  The buyout price of 3.0 p/kWh was proposed in October 2000 at which time the development of NETA was well advanced although some uncertainties remained about its final shape and timing. The buyout price proposed took account of NETA and other expected developments in the market. Responses to the consultation at that time expressed a range of views but did not present a clear case for either increasing or reducing that figure.

  Over the last two years, electricity prices in forward markets have been broadly constant, with prices for year ahead annual base load power largely in the range 1.8—2.0 p/kWh. However, in recent weeks, overall prices have dipped quite sharply. There have also been industry concerns over the past year that the actual operation of NETA is adversely affecting unpredictable generation, such as wind, to a greater extent than anticipated. These concerns have been taken up in a recent Government response ( see answer to Question 17).

  Ofgem has committed in its Corporate Plan to carry out a review of NETA covering the first year of operation, to be published in the second quarter of 2002. Ofgem has indicated that it intends to cover, amongst other issues, smaller generators, including unpredictable renewables. It is unclear whether the current low level of overall electricity wholesale prices can be maintained for any period of time. There are already reports of some plant being mothballed because of the low level of prices.

  On the other hand, there is anecdotal evidence that ROCs for the early years of the Obligation are trading at around 4.5 p/kWh. The way that buyout payments are recycled to suppliers means that the greater the shortfall of actual renewables relative to the Obligation, the greater will be market value of ROCs. This mechanism serves to partly offset the adverse impact of lower electricity prices.

  It is vital to bear in mind that the potential combined value of ROCs and climate change levy certificates—3.4 p/kWh or more—is well in excess of variations in the wholesale value of electricity. This means that, for example, a 0.5 p/kWh change in the electricity price—about 25 per cent—would only affect the overall market value of renewables by around 10 per cent.

  The impact of a 10 per cent change in the value of renewables is considered to be within the range of uncertainty that accompanied the proposal to set the buy-out price at 3.0 p/kWh. Furthermore it is not yet clear to what extent, if at all, current low prices and/or market discounts for unpredictable generation will persist into the longer term.

NETA AND NETWORK ISSUES

  17.   Does the DTI accept the conclusion in the PIU report that NETA remains a major barrier to the deployment of renewables? The Energy Review goes on to suggest that progress in eliminating this barrier should be closely monitored. What criteria (including targets and/or deadlines) will the DTI use to assess progress?

  In relation to NETA, the PIU concluded that "a number of barriers stand in the way of the deployment of [renewable generation] technologies", including prices received by intermittent generators in the electricity market (7.66). It stated further that "the evidence suggests that intermittent generation is suffering as a result of a range of issue related to NETA. While intermittents are having particular problems, other smaller generators are also experiencing difficulties, as Ofgem has recognised." (7.132). Finally, in its "Concluding Themes", the PIU identifies the treatment of small and intermittent generators in NETA as one of "three institutional barriers to renewables" which have been identified.

  On 31 August 2001, following industry concerns and a request by DTI, Ofgem published its "Report to the DTI on the Review of the Initial Impact of NETA on Smaller Generators" (the Smaller Generators Report). Ofgem's main findings were:

    —  Export prices achieved by smaller generators were 17 per cent below those achieved a year earlier under the Pool. These reductions were somewhat smaller than for generation prices overall.

    —  Output had fallen substantially for smaller generators, with export volume reduced by 44 per cent compared to a year earlier. The Ofgem data indicated that the output from renewable generators had fallen by around 5 per cent, which may be attributable to climatic factors, rather than the introduction of NETA.

    —  Other than wind power, the output of smaller generators did not appear to be significantly less predictable than for other generators.

    —  Consolidation services had not yet developed to the extent that would appear feasible.

  The Government recognises the findings in Ofgem's report. On 1 November 2001, in response to Ofgem's report, the Government published a consultation document (the Consultation Document), to seek views on proposals to help smaller generators operate effectively under NETA. It considered a wide range of potential options and implications, including views put forward by industry, both in the course of Ofgem's review, and to DTI.

  On 4 April 2002, the DTI published the Government Response to its consultation on NETA and smaller generators (the NETA Consultation) of 1 November 2001. This sets out the measures Government has identified to ameliorate the situation for smaller generators under NETA, including urgent practical action to help smaller generators.

  The NETA Consultation confirmed the Government's original analysis that smaller generators face two main issues under NETA, (i) cost reflectivity and related imbalance price risk and (ii) a lack of route to market (mainly through lack of consolidation services, and through commercial obstacles).

  Positive improvements have been made since the consultation document, including further reduction of volatility of imbalance prices and practical work to address some of the technical obstacles to consolidation. The Government recognises that concerns remain, despite these improvements, about cost reflectivity and imbalance price risk, and wider commercial considerations, particularly the negotiating position of smaller generators compared to local incumbent suppliers.

  The Government Response identifies further action to address these issues:

    —  Improving the effective operation of NETA, in particular risk management: a forthcoming modification to the system to reduce "gate closure" (ie participants will not have to predict their output as far in advance) is expected to help all participants to manage their risk and reduce their exposure to imbalance prices. Ofgem have indicated that they believe that a reduction in gate closure could better facilitate the achievement of relevant BSC objectives and that the proposed implementation date of 2 July 2002 is appropriate.

    —  Access to embedded benefits: DTI and Ofgem will undertake work to look at unbundling embedded benefits. This could improve the commercial position for smaller generators and independent consolidators.

    —  Guidance for smaller generators: the Government will put in place work to assess the need for comprehensive guidance for smaller generators. DTI will make available funding to provide guidance provided the need is established. Ofgem will co-ordinate publication of such guidance if the need is established.

    —  Standardisation of contracts: Ofgem will make an assessment of the need for standard contracts for smaller generators and how such contracts could be implemented.

    —  Cost reflectivity: the Government believes it is too early to reach a firm assessment on cost reflectivity of the current system. Further analysis, including data for a whole year of NETA, is necessary. The Government has considered very carefully proposals made by respondents to the consultation for more radical change, but it does not believe that quick, practical radical changes have been identified. Ofgem has committed in its Corporate Plan to carry out a review of NETA covering the first year of operation, to be published in the second quarter of 2002. Ofgem has indicated that it intends to cover, amongst other issues, the operation of the Balancing Mechanism. The Government has asked Ofgem to report on progress in further improving the effectiveness of NETA and ensuring imbalance prices are genuinely cost reflective, as part of its review of the first year's operation of NETA. If such an assessment does not show that the current system is working, the Government will need to reconsider the case for more radical changes to the NETA system.

  18.   Is the DTI satisfied by the progress being made following the report of the Embedded Generation Working Group? Can the DTI suggest any measures that could be taken immediately, rather than within the context of the next price review, to improve access to networks for embedded generators?

  The DTI, in conjunction with Ofgem, has established a co-ordinating group, the Distributed Generation Co-ordinating Group, to monitor progress in implementing the recommendations made by the Embedded Generation Working Group and to inform Ministers of any problems, which may arise. The recommendations of the Embedded Generation Working Group were generally conceptual in nature, and much detailed work needs to be undertaken before action can be implemented. Nevertheless, the DTI is satisfied that the arrangements in place will ensure that this work is expedited in an appropriate fashion and allow any emerging problems to be identified and addressed.

  The key issue identified by the Embedded Generation Working Group concerning the access of embedded generation to the network, related to DNO incentives. Major developments in this area will need to await the next price review, however one area where beneficial changes may be made prior to 2005 is that of connection charging. A move away from the current "deep" connection charging regime to one where connectees pay up front only for assets uniquely associated with their connection to the network, would remove a significant barrier to new developments and at the same time provide an incentive to DNOs to connect. Ofgem have recently consulted on this issue and have now produced a follow up document.

  19.   What progress is the DTI making in developing an overall strategy for electricity networks which can accommodate different possible future scenarios for energy generation (eg micro-CHP as against large remote wind farms)? To what extent does it consider that this can be left to the operation of markets to determine?

  The technical and regulatory implications of the widespread application of micro or domestic level generation were highlighted by the Embedded Generation Working Group. Progress in addressing these issues will be monitored by the Distributed Generation Co-ordinating Group. Specific ongoing activities include the G83 Working Group, led by the Electricity Association, which is producing a technical guide for the connection of micro-generation, and two projects funded by the DTI as part of the Sustainable Development Programme to identify the technical implications of the widespread application of micro-CHP.

  Ideally, the development of micro-CHP and other domestic level generation should be a matter for the market. However, the DTI recognises the potential benefit micro-CHP technology in terms of energy efficiency and CO2 reduction and is concerned to ensure that all unjustified barriers to the development of micro-CHP, whether technical, commercial or regulatory, are removed.

EU ASPECTS

  20.   Can the DTI briefly describe the current position and likely future developments at an EU level to encourage a harmonised approach to energy policy and EU-wide trading schemes for renewable energy and for carbon.

  The EU's energy policy is based on subsidiarity, action at community level being taken only when an objective cannot be achieved at Member State level. There is no specific Energy Chapter in the European Treaties. Instead, the European Commission has available a range of measures serving energy policy objectives under the general provisions of the Treaties, including free movement of goods, competition and environmental protection. Notwithstanding Commission calls for an Energy Chapter, the UK and most other Member States think these provisions give the Commission sufficient power for action needed at Community level. For example, the UK strongly supports consistent, effective enforcement by the Commission of the Gas and Electricity Directives and of state aid rules; and we welcome the Commission's dialogue with the supplier countries, which helps to promote market stability.

  At the same time, we would support a more active Commission role in some areas, such as more vigorous use of competition rules (to take into account the impact of acquisitions in other Member States by companies dominant at home and the need to provide a level playing field for new market entrants). The EU's energy policy is likely to remain one of close cooperation between Member States and the Commission, with action at Community level taken only when this adds value to that at Member State level. An Energy Chapter would not of itself ensure the appropriate balance between the sometimes-contradictory energy objectives of security of supply, competition and the environment. The UK and most other Member States are therefore likely to continue to reject the Commission's call for a fully harmonised approach to energy policy.

  The recent EU Directive on promoting electricity from renewable sources requires Member States to put in place arrangements for supporting renewables, with the opportunity for the Commission to propose a harmonised scheme at a later date if sufficient progress has not been made by Member States. It would be premature, therefore, to talk about a harmonised scheme across the EU. There may, however, be benefits in trade between Member States in renewable energy where compatible arrangements exist for the certification and market support of renewables. This would, for example, provide the opportunity for UK-based renewables generators to export their power overseas, and may offer cheaper prices for renewable energy in the long term. At the same time, we need to provide the security for investment in new renewable capacity. If investors perceive a risk in the return they may attract under the Renewables Obligation, then investment may not be forthcoming. We believe, therefore, that the correct approach to trade in renewables between Member States should be approach on a case-by-case basis through bilateral arrangements. It is conceivable that in a few years time, the scope of these bilateral arrangements may encompass the majority of Member States but we should not underestimate the practical hurdles that will have to be overcome in the meantime.

  The European Commission published its proposal for a Directive for an EU greenhouse gas emission trading scheme in October 2001. There has been discussion of the main principles of the scheme and a first run thorough of the proposal in Environment Working Group. These discussions are ongoing and although progress is expected during the current Spanish Presidency it is not envisaged that agreement will be completed during Spain's tenure. The proposed EU scheme would begin in 2005, with a lighter regime being adopted prior to the commencement of Kyoto targets in 2008. As it stands the scheme is estimated to cover 46 per cent of EU carbon dioxide emissions by 2010. The EU scheme is proposed to be a mandatory scheme fully focussed on direct emissions. In contrast to the UK Emission Trading Scheme its proposed coverage extends only over one of the six greenhouse gasses and is limited to only six industrial sectors against which the UK scheme already involves companies from over 40 different sectors.

  21.   Has the DTI carried out any comparative analysis of the level of Government and market support for renewable energy in this country and in other member states? If so, what are the results and comparative figures?

  The DTI has not carried out a comparative study recently but the International Energy Agency (IEA) carries out an annual review of member States Energy policies and an in-depth review every four years. The latest review, 2001, provides the following figures for R&D expenditure for the year 2000 in EU Member States:

 

 

Country

R&D expenditure in 2000
(US$ million at 2000 prices and exchange rates)

Denmark

14.9

Germany

55.8

Portugal

0.7

Spain

13.2

United Kingdom

8.5

Latest figures for other EU member states

 

Austria

8.6 (1999)

Belgium

0.9(1999)

Finland

5.2(1999)

France

11.6(1999)

Greece

5.6(1997)

Ireland

0.4(1990)

Italy

29.9(1998)

Netherlands

39.5(1999)

Sweden

12.2(1999)

Luxembourg

No Energy R&D programme

 

  Support schemes for renewables have not been in existence for sufficient period to enable the relative effectiveness to be evaluated. In the Directive on the Promotion of Electricity from Renewable Energy Sources in the Internal Electricity Market (September 2001) the preamble states that "It is too early to decide on a Community-wide framework regarding support schemes, in view of the limited experience with national schemes and the current relatively low share of price supported electricity produced from renewable energy sources in the Community". The Directive obliges the Commission to review the operation of these schemes by 27 October 2005 and "the report shall, if necessary, be accompanied by a proposal for a Community framework with regard to support schemes for electricity produced from renewable energy sources."

  There have been several studies comparing the various renewables support schemes. A number of French experts in energy economics produced a report in May 2001and their conclusions are summarised below:

    Quantity based approach (for example the UK Non-Fossil Fuel Obligation)

    Advantages

    The most effective in controlling the cost of support: competitors must reflect decreasing costs in order to win subsidies.

    Disadvantages

    Highly competitive and limited margins make it more difficult for manufacturers to invest in R&D.

    Feed-in Tariffs (for example, Germany)

    Advantages

    Project developers see fixed prices as providing a stable environment resulting in a larger installed capacity than other support mechanisms. Manufacturers are therefore able to invest more heavily in R&D and to consolidate their industrial base, evidenced by the fact that Denmark, Germany and Spain are world leaders in wind turbine production.

    Disadvantages

    Difficult to predict the number of entries into the renewables market, little incentive to lower costs since drops in production costs are not automatically reflected in the feed-in tariffs: the cost of support is therefore high.

    Quota-based green certificate trading systems (e.g. the UK renewables obligation)

    Advantages

    More precise control over quotas, the creation of competition amongst producers and the incentives to lower costs.

    Disadvantages

    Unproven. Uncertainties concerning market operation and the creation of a stable framework.

  A project entitled "Promotion Strategies for Electricity from Renewable Energy Sources in EU Countries" and supported under the Fifth Framework Programme reported in June 2001. Its conclusions are in line with those summarised above. It produced the following table listing the then current promotion strategies for electricity from new renewable energy sources in the EU:

 

 

Country

Major Strategy

Additional Instruments

Austria

Quotas (4 per cent "new" renewables,
8 per cent small hydro by 2007)

Rebates and feed-in tariffs for biomass, PV and wind

Belgium

Feed-in tariffs (Brussels) (2.7 million Euro in 1999)/ Tradable Green Certificates (Wallonia, Flemish region)

Rebates, investment based tax reductions

Denmark

Feed-in tariffs (currently under review)

Tax relief eg tax, income tax exemptions

Finland

Tax relief (FIM 300 million (EURO
50 m)/year)

Rebates

France

Tendering (for wind energy)

Grants for PV, biomass and wind in rural areas (stand alone systems)

Germany

High feed-in tariffs

Soft loans, local rebates, green tariffs

Greece

Feed-in tariffs

Subsidies and tax reduction

Ireland

Tendering

Tax incentives, subsidies

Italy

High feed-in tariffs

Quotas

Luxembourg

Feed-in tariffs

Investment subsidies

Portugal

Feed-in tariffs

 

Spain

High feed-in tariffs (
712 million in 2001)

Funds

Sweden

Rebates and tax relief

Feed-in tariffs for small generators

The Netherlands

Quotas (3 per cent by 2000)

Complex strategy (green labels, tax refunds 2000: NLG 30 million
(
14 million) and feed-in tariffs), target programme for PV

UK

Quotas (10 per cent by 2010), Tradable Green Certificates

Pollution tax relief, green tariffs

 

  The IEA's Renewables unit is compiling a database of Member Countries' renewables policies, to be completed this summer. In cases where the budget for a support scheme is already available, it has been inserted into the above table.

  22.   Please provide data on the extent to which the UK has accessed funding available for renewables under the Campaign for Take-off and any other EU schemes. How does this compare with other countries?

  The Campaign for Take-off is the Commission's promotional campaign aiming to kick-start the Commission's strategy to increase the penetration of renewable energy. It does not have its own budget line, but relies on funding from the ALTENER programme. All ALTENER projects however promote renewable energy and will contribute towards the aim of the Campaign for Take-off. The UK usually features strongly in ALTENER projects, as do Spain, France Germany and Greece and Italy.

  In the 2001 ALTENER round,

    —  8 of the 54 projects recommended for funding were co-ordinated by a UK organisation (compared with Spain 8, Greece 7, France 6, Netherlands 6, Belgium 4, Germany 3, Sweden 3, Italy 2 and Denmark 2)

    —  Of the

    17.4 million recommended funding,

    2.5 million is attributable to UK organisations (compared with Spain

    2.1 million, Greece

    2.1 million, France

    1.9 million, Italy

    1.8 million, Germany

    1.5 million, Netherlands

    1.1 million, Belgium

    1.0 million

    —  There were 40 UK out of a total 283 participants in projects recommended for funding (compared with Spain 41, Italy 35, Germany 27, France 27, Greece 27, Belgium 13 and Austria 12)

  The current round of structural funds runs from 2000 to 2006 so programmes are at an early stage of funding allocation. Funds so far allocated to renewables projects in the UK amount to some 1.98 million.

  Detailed figures for EU R&D carried out in collaboration with the 15 EU Member States, 10 Accession countries plus Israel, Norway, Iceland and Liechtenstein, under the non-nuclear element of the European Commission's Fifth Framework Programme which include renewables, energy efficiency, gas turbines, CO2 sequestration etc (the ENERGIE programme) are not available for individual technologies or for individual participating countries. However, we do know from figures recently made available for 2002, that 70 separate UK organisations will be participating in 43 per cent of successful renewables projects and the commitments for those projects will be around

68.1 million, to be paid over a number of years to all the participating organisations. The number of separate organisations who will participating in the renewables R&D element of the ENERGIE programme include 138 from Germany, 60 from France, 44 from Italy, 42 from the Netherlands and 60 from Denmark.

April 2002

 


1   For the avoidance of doubt, renewable generation located in Scotland can be used to meet the England and Wales RO and vice versa. Back

2   Subject to Northern Ireland also making its contribution. Back

 
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